THE BOTTOM LINE:
The S&P 500 reached my upper overbought 'trading band' at 3% above its 21-day moving average after which it got slammed on a bunch of new worries about a slowing economy. Technically, the pullback found buyers at a 'predicted' chart support. This was an area of buying interest suggested by the hourly S&P 500 (SPX) chart and its inverse 'Head & Shoulders' pattern outlined last week. This chart formation suggested that technical support could be found on a pullback to what had been prior resistance, at the H&S 'neckline'. See the hourly chart below. Amazing how accurately SPX followed this script so far.
An idealized upside objective for SPX as seen above is to 1390 based on the measuring implication of the aforementioned H&S bottom pattern for the Index. The inverse Head & Shoulder's bottom was traced out not only in the hourly SPX chart but on all the major indices. A note of caution about putting too much faith on the resulting upside targets implied by the pattern: objectives implied the INVERSE (bottom) H&S, as opposed to the Head & Shoulder's TOP pattern, don't tend to be AS accurate a predictor. Prices tend to fall farther and faster in a mixed market (with all those worries!) when fear takes over. The implied 'minimum' downside objective for the H&S top pattern is more often hit, or exceeded.
Time will tell on a further advance, either to test resistance again in the 1360 area in the S&P or to the 2935-2940 area in the Nasdaq Composite (COMP). Since COMP has been lagging in the current market cycle I've modified COMP and NDX's upper moving average envelope from 4% above the 21-day moving average down to 3% (same as the S&P and Dow) as you'll see on those charts. I typically use a 4% envelope value for the Nasdaq indices, but not always. Envelope values need adjusting from time to time.
While I'm using a 3% UPPER envelope value currently for COMP and the Nas 100 (NDX), I've kept the 4% value for the LOWER envelope line. If what you use for charting only allows ONE value for BOTH upper and lower envelope values, use 3 per cent; keeping in mind that another sharp downswing may well overshoot a lower 3% envelope line in Nasdaq. Use of the moving average envelope lines (with a 21-day moving average on the daily chart) is another way of estimating where upside or downside moves are overbought or oversold respectively.
You may well wonder what factors will keep UPSIDE moves afloat. I won't try to predict what the fundamentals are or will be that could influence that. There is a lot of bearishness out there and a lot of shorting going on. Goldman no less suggested to its clients being short S&P 500 futures after the Fed indicated no new MAJOR simulative moves. Short-covering rallies can then ensue on even minor bullish influences that come along; e.g., a better than expected housing starts number or a larger add than anticipated to non-farm payrolls, etc.
In terms of all daily charts seen below; they still look to have some further bullish potential as long as support holds up at the 21-day averages. Longer-term, it's also true that EACH rally since the early-April high has topped out at a lower relative high leading me to rate the intermediate-term picture as mixed to bearish. As you'll see on my charts, a move about 1372 in SPX, 622 in OEX, 12850 in the Dow, to above 2946 in COMP and 2632 in NDX, is needed to penetrate their April-May down trendlines. Conversely, a decisive downside penetration of 1320 in SPX in the coming week would suggest we've already seen a maximum upside move for now and little chance of a breakout move anytime soon.
I'm always mainly looking for a good-sized price swing, such as we got after the SPX dip below 1270, Dow 12100 and NDX's fall to the 2450 area. The ensuing rallies stopped in their tracks at the overbought upper envelope lines (revised to 3% for Nasdaq), among other ways of measuring technical resistance such as AT the down trendlines already mentioned. I still am holding some index calls, until and unless there's break below the 21-day moving averages or to below key SPX support around 1320. Shorting rallies by buying puts or in other bearish strategies looks to have a favorable risk to reward when prices reach the upside resistance extremes noted on my normal line up of index charts below.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart is mixed in its pattern. It's bearish on an intermediate-term basis. A move above 1372 is needed to pierce the April-May down trendline. A breakout above implied resistance at the down trendline is the key technical/chart determinant of whether there's further upside potential in the S&P. The recent rally stopped at the 3% upper envelope line; as soon the index reached an 'overbought' price level in this sense, there was a downside reversal that followed. The rally failure in the 1360 area was also resistance implied by a prior line of support in April-May.
More factors then not suggest the recent rally has run its course. On the bullish side of things, is the bounce from the 'neckline' of the Head & Shoulder's bottom; an example is seen in the hourly SPX chart I show above in my initial 'bottom line' comments. The ability so far for the index to hold above its 21-day average is also a bullish plus. Stay tuned on that.
Key resistance is in the 1370 to 1375 price zone. Key near support is at 1320, with next support at the important 1300 level in SPX.
Bullish sentiment has increased in my sentiment model to a 'neutral' level; not particularly bullish or bearish. The 13-day RSI indicator has also fallen back to a neutral range.
It seems that investors wants to have a reason to be bullish but our market is captive to bearish global economic events and concerns.
S&P 100 (OEX) INDEX; DAILY CHART
The big cap S&P 100 (OEX) rally failed at the internal down trendline seen on the daily chart. (An 'internal' trendline connects the MOST number of highs or lows; highs of course in the case of the highlighted down trendline.) A decisive upside penetration of trendline resistance at 622 would be bullish. Absent that, lower levels ahead looks likely.
I mentioned other bearish chart factors for the S&P 500 above; the same is seen with OEX. The rally failed at my upper 3% moving average (the 21-day average) envelope line, which tends to mark the high end of a back and forth trading range. The pivotal technical aspect is the rally failure at the down trendline, suggesting the Index is back in a sideways to lower trend.
Key resistance is in the 620 to 625 range. 622 is trendline resistance. It doesn't look likely that the down trendline will be pierced.
The key support zone is 597-603. Fairly major support begins around 590, extending to 580.
THE DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU), which had been in a rebound, although INDU was lagging, reversed at its own down trendline, dating from its early-May peak. As soon as the Dow got to my upper envelope line, suggesting that the Average was 'extended' on the upside, the bears lowered the boom or we could say the bulls ran into a buzz saw of bearish news. Europe is a mess, what can I say. Integration is one hard prolonged process, witness our own economic (and political) union.
Bank stocks are doing a bit better and still-bullish is AXP, DIS, maybe GE, HD, IBM probably, KFT, KO, MRK and PFE probably, T, VZ, and WMT. Others of the Dow are at correcting, at beat neutral and some are the new 'dogs of the Dow'; I won't mention any names. But hey, put Apple in the Dow, take out HPQ and you've got an immediate boost to INDU.
Key resistance implied by INDU's down trendline is at 12850, with next resistance in the 13000 area. Near support is highlighted at 12500, up just a 100 points from last week; next support then looks like 12400.
Last week I was more optimistically thinking that the Dow could 'ideally' reach the 13100-13200 area, but that kind of target seems far out of reach now that we've seen the rally stop dead in its tracks at INDU's down trendline.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) saw upside follow through this past week but its rally hit a technical brick wall at the upper envelope line, when adjusted downward from 4% to 3%. Most importantly chart wise, was the newly EXTENDED down trendline dating from the April-May highs. This past week's intraday high made for the 3rd point in what's now an April-May-June down trendline. The third point of intersection of any trendline tends to make for a best defined line of resistance; two points begins a trendline, but 3 or more points make it a 'tougher' resistance.
So, trendline resistance is seen now at 2946. I've also highlighted 'resistance' at 2949, at the upper envelope line, with next resistance coming in around 3000 a point if reached that would represent a bullish break out above the current down trendline.
Near support implied by the 21-day moving average intersects at 2843; next support comes in at 2800-2785.
On balance, the path of least resistance looks lower; only a bullish breakout above the down trendline changes the chart picture to a more bullish one. As noted with the S&P 500, my key indicators, bullish/bearish sentiment and the Relative Strength Index are more or less at 'neutral' readings so I can't cite a bullish or bearish influence suggested by them.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) Index continued bullish chart action this past week UNTIL its most recent high hit an extension of the April-May down trendline. After that tech and rest of the market mostly got slammed. I find it fascinating that bearish news often 'comes out' AFTER technical resistance is hit. The same is often true of bullish news 'coming out' after the market gets very oversold, hits the lower end of a downtrend channel, etc.
I lowered my upper (overbought) envelope line to 3%, from 4%, given the lackluster nature of the latest tech advance. This redrawn envelope line also got intersected at the recent top. I'll keep the upper line for NDX (and COMP) set to 3% above the 21-day moving average. I don't use a lot of indictors but using 3-4% envelope lines on the major stock indices is one I recommend to all. They get adjusted from time to time depending on volatility. The envelope model provides an idea of where the market is not only over-bought or over-sold but also (very importantly) at what PRICE level this is occurring at.
NDX rebounded a bit on Friday of course but the most promising strategy looks to be shorting rallies as the path of least resistance looks lower. A rally back up to near the down trendline has a favorable risk to reward for puts, assuming an exiting stop just over the trendline. A bullish upside penetration of the down trendline suggests further upside potential; enough so I wouldn't want to be short.
Near resistance is at 2600, with pivotal resistance at the down trendline, currently intersecting around 2625. Near support is suggested by the 21-day moving average, currently at 2544 and next support at 2508-2500. As long as NDX holds above the 21-day average, the chart doesn't look all that bearish. I consider the short-term trend to reverse to lower if the average is however pierced.
I wrote last week that a "'minimum' upside target implied by NDX's Head and Shoulder's bottom formation suggests the index could reach 2677..." Given the reversal at the down trendline, this much upside seems well out of reach.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) chart now looks bearish with the NDX rally failure at its down trendline. I've noted near resistance at 64.0, extending to 64.5. A move through this resistance zone (64-64.5) would also represent a bullish upside penetration of the down trendline.
A Close above 64.25 would be an early warning to exit short positions/puts in QQQ. If there's a move above resistance, 66 is a possible target. Not likely but possible.
Near support is seen at 62-61.8; I didn't highlight very near support implied by the 21-day moving average at 62.45.
It surprised me some when volume didn't really SPIKE on Thursday's sell off and I take this action as a mild bullish plus. Maybe QQQ is somewhat 'sold out' of the weak-hands bulls and there's another rally in store for us, such as back to retest our most recent highs. Stay tuned on any such bullish surprise, especially a breakout move above 64-64.25.
RUSSELL 2000 (RUT); DAILY CHART:
The most recent rally in the Russell 2000 (RUT) failed at its down trendline dating from March and late-April/early-May.
There were a couple of closes above the key 50-day moving average but the reversal at the down trendline was the stopper. Pivotal (down) trendline resistance currently intersects at 785. I've highlighted initial resistance at 780, extending to 785.
Support is seen at 760, extending to 750.
RUT looks lower from here but an upside breakout still shouldn't be ruled until/unless the key 21-day moving average is pierced for more than a day.
GOOD TRADING SUCCESS!